Your credit score impacts most areas of your life as a consumer, whether you know it or not. It can determine the interest rate on the mortgage for that dream house you just built. It can be the factor that makes you choose to buy from the used car lot instead of buying new. It can even impact if you’ll be able to take out a loan to kick-start that new business you’ve always dreamed of having.
Instead of stressing over what goes into your credit score, let’s take a look inside that mystery number and see what it’s made of, and some best practices to keep your score at just the right level.
Brief Explanation of Credit Scores
Firstly, your credit score is usually a number between 300 and 850. The higher, the better:
- Under 600 = bad
- 600-649 = poor
- 650-699 = fair
- 700-749 = good
- 750+ = excellent
The scores above represent a general breakdown of the typical ratings, as there are multiple scoring models out there (namely, FICO and VantageScore).
Your score is a composite that comes from the three major credit reporting agencies (TransUnion, Equifax, and Experian). It is then used by banks and other agencies to qualify you for loans, opening new credit cards, and even signing a lease.
The number itself is made up of mostly of your personal history of payments (35%), then how much debt you have (30%), followed by credit history (15%), new credit (10%), and the remainder of types of credit you have accrued (10%). By understanding these percentages, you can move forward with your credit score in the best way possible.
How to Improve Your Credit Score
The most important thing to understand is that a credit score will not change overnight. To improve a poor rating, it will take discipline and restraint: cut costs where you can, and always make card payments on time. Always. Pay off as much debt as possible with your saved money (once again, cut costs where possible), and pay off your loans early. It will take time, but you will be surprised at how saving money can snowball and turn a poor credit score upside down.
Contact a member of our team at Taxation Solutions, Inc. for questions on credit and how to turn your score into a tool rather than a crutch.